Helena Rubinstein used guile, brilliant branding, and more than a few falsehoods to lift cosmetics from an accessory for prostitutes to a desired luxury item. Geoffrey Jones reveals her history.
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Coming out of the financial crisis, Wells Fargo was one of the world’s most successful banks. But then its sales culture went wild, opening more than 2 million fake accounts. Suraj Srinivasan discusses what went wrong.
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Company management frequently seeks to exclude investor proposals even though some ultimately win shareholder support, according to new research by Eugene F. Soltes, Suraj Srinivasan, and Rajesh Vijayaraghavan.
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Professor Suraj Srinivasan explores one of the largest cyber breaches in history, analyzing why failures happen, who should be held accountable, and how preventing them is both a technical problem and a matter of organizational design.
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Shareholder proposals are an important way for investors to communicate their demands to a firm’s management and board of directors. Here the authors gain insight into how such proposals can be excluded from a shareholder vote by management appealing to the Securities and Exchange Commission (SEC). Among the findings, firm managements seek to exclude almost half the proposals suggested by shareholders with nearly a quarter ultimately excluded with permission of the SEC.

Hedge fund activism has become a significant phenomenon in recent years. Compared to traditional shareholder activists, for instance, hedge fund activists have been making a broader range of demands and adopting a wider range of tactics to have those demands met. Given the importance that the demand for board positions has in the activist game plan, the authors of this paper examine hedge fund activism through cases where candidates sponsored by the activists become directors of the target companies. Findings show that activist directors appear to be associated with significant strategic and operational changes in target firms. The study also shows evidence of increased divestiture, decreased acquisition activity, higher probability of being acquired, lower cash balances, higher payout, greater leverage, higher CEO turnover, lower CEO compensation, and reduced investment. The estimated effects are generally greater when activists obtain board representation, consistent with board representation being an important mechanism for bringing about the kinds of changes that activists often demand. Key concepts include: Activists are more likely to gain board seats at smaller firms and those with weaker stock price performance. Gaining board positions is an important mechanism that allows hedge fund activists to have an impact in ways that line up with the demands that they make of companies.
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More than a decade after its inception, the effects of Sarbanes-Oxley seem, if anything, beneficial, say Harvard's Suraj Srinivasan and John C. Coates. Why then do so many critics remain?
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Activism by hedge fund and other investors to improve governance and performance of companies has become a significant phenomenon in recent years. In this paper the authors examine a number of career consequences for directors when firms are subject to activist shareholder interventions. Examining 1,868 activism events—all publicly disclosed shareholder activism from 2004 to 2012 conducted by hedge funds or other major shareholders—the authors find that directors exit the board at a higher rate when their firms are targeted by activists. Even directors not specifically targeted by dissident shareholders are also likely to leave the board, as are directors at firms targeted by activism with no board-related demands, let alone a formal proxy fight. Overall, whether departure is voluntary, optimal, or otherwise, the evidence suggests that activism is associated with career consequences for directors. Key concepts include: Shareholder activism imposes career costs on directors. Shareholder activism in companies results in career consequences for directors even if the activism is not directed explicitly at board representation. Directors that receive a greater negative vote percentage in the year of shareholder activism are less likely to remain on the board in the year after activism. Directors are more likely to leave following poor performance when there is shareholder activism targeted at the company. However, there is no evidence of an impact of activism on director reputation as reflected in directorships on other boards. Even directly targeted directors experience no loss in other directorship.
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Shareholders have two publicly visible means for holding directors accountable: They can sue directors and they can vote against director re-election. This paper examines accountability of independent directors when firms experience litigation for corporate financial fraud. Analyzing a sample of securities class-action lawsuits from 1996 to 2010, the authors present a fuller picture of the mechanisms that shareholders have to hold directors accountable and which directors they hold accountable. Results overall provide an empirical estimate of the extent of accountability that independent directors bear for corporate problems that lead to securities class-action litigation. These findings are useful for independent directors to assess the extent of risk they face from litigation, shareholder voting, and departure from boards of sued firms. While the percentage of named directors is small compared with the overall population of directors, individual directors can weigh their risk differently. From a policy perspective, the findings provide insight on the role that investors play in holding directors accountable for corporate performance. Key concepts include: About 11 percent of independent directors are named as defendants in securities lawsuits when the company they serve is sued. Audit committee directors-consistent with concerns about litigation exposure of these directors-and directors who sell shares during the class period are more likely to be sued. Shareholders in sued firms also hold independent directors accountable by voting against them, including a greater negative vote for named directors. Directors of sued firms, and especially those who are named, are also significantly more likely to lose their board seats in the sued firm. This effect is more pronounced after 2002 than before, possibly reflecting greater sensitivity towards the role of corporate directors in recent corporate scandals. Lawsuit outcomes vary when independent directors are named in lawsuits. When directors are named, cases are less likely to be dismissed, and they settle faster and for greater amounts. Some evidence points to the strategic naming of independent directors by the plaintiffs to gain bigger settlements.
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In the US, securities class action litigation provides investors with a mechanism to hold companies and managers accountable for violations of securities laws. This study examines the incidence of securities class action litigation against foreign companies listed in the US and the mechanism driving the litigation risk. Looking at more than 2,000 securities class action lawsuits between 1996 and 2010, the authors find that significant litigation risk does exist for foreign issuers, but at rates considerably lower than for US companies. The authors also identify potential factors in lower litigation rates: 1) transaction costs and 2) the lower rate of trigger events such as accounting restatements, missing management forecasts, or sharp drops in stock prices that are needed in a lawsuit context to allege intentional and wrong prior disclosures on the part of managers. This suggests that while the effective enforcement of securities laws is constrained by transaction costs, availability of high quality information (that reveals potential misconduct) can contribute to a well-functioning litigation market for foreign firms listed in the US. Key concepts include: Foreign firms listed in US are only half as likely to have a securities class action lawsuit as comparable US firms. This lower rate is economically meaningful. Transaction costs of pursuing litigation against foreign firms play a role. Firms in countries that are farther from the US, have weaker judicial efficiency in the home country or have a weaker track record of prior US. acquisitions are less likely to be targeted by plaintiff investors and attorneys. Once a lawsuit-triggering event like an accounting restatement, missing management guidance, or a sharp stock price decline occurs, there is no difference in the litigation rates between a foreign and comparable US firm Lower litigation risk for foreign firms implies that, relative to US firms, foreign firms will face less frequent pressure to improve disclosure quality and corporate governance or make other corrective actions following a lawsuit.
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The authors study restatements by foreign firms listed in the US, compare the extent of restatements by the foreign firms to that of domestic US firms, and examine the role of home country characteristics on the likelihood of the foreign firms restating their financials. When foreign firms list in the US, they become subject to the same accounting rules and regulations as US firms. However, results suggest that foreign firms listed in the US restate significantly less than comparable US firms. This difference is not because the foreign firms have superior accounting quality but because of opportunistic avoidance of issuing a restatement. The difference is driven primarily by firms originating from countries with weaker institutions. Overall, findings imply that restatements are a less accurate measure of the extent of reporting problems in an international setting compared to US domestic firms. Key concepts include: Foreign firms listed in the US are subject to a less rigorous monitoring and enforcement regime than domestic US firms. Weaker institutions in the firm's country of origin lower financial reporting quality of foreign firms accessing US markets, despite a common set of US rules and enforcement that apply to all foreign firms. An accurate reflection of accounting quality through restatement reporting is a necessary information mechanism for the US Securities and Exchange Commission (SEC) and investors to hold managers and auditors accountable. Fewer restatements can lead to a lower level of scrutiny, which is a concern from the point of view of investor protection.
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Understanding whether and how corporate profitability mean reverts across countries is important for valuation purposes. This research by Paul M. Healy, George Serafeim, Suraj Srinivasan, and Gwen Yu suggests that firm performance persistence varies systematically. Country product, capital, and to a lesser extent labor market competition all affect the rate of mean reversion of corporate profits. Corporate profitability exhibits faster mean reversion in countries with more competitive factor markets. In contrast, government efficiency decreases the speed of mean reversion, but only when the level of market competition is held constant. The findings are useful to practitioners and scholars interested in understanding how country factors affect corporate profitability. Key concepts include: There is predictable variation in mean reversion in corporate performance across countries. At a practical level, valuation exercises can benefit from considering country as well as traditional firm and industry factors in settling on the speed with which superior or inferior profits are likely to mean revert. Different level of performance persistence in each country will affect firm-value through valuation multiples.
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What are the costs and benefits of auditors providing non-audit services? In this paper, the authors investigate whether high non-audit services (NAS) fees relative to audit fees are associated with poor quality financial reporting. Associate Professor Suraj Srinivasan and colleagues look specifically at a sample of S&P 500 firms during the years 1978-80. The authors thus provide an early history analysis of a long-standing regulatory concern that NAS fees create an economic dependence that causes the auditor to acquiesce to the client's wishes in financial reporting, reducing the quality of the audit. This concern led the Sarbanes-Oxley Act to prohibit auditors from providing most consulting services. The authors find that, contrary to regulatory concerns, NAS are associated with better quality financial reporting: lower earnings management and higher earnings informativeness. Conclusions rely on the specific institutional features of the years 1978-80. Key concepts include: Providing NAS does not automatically lead to weaker audit quality. Greater information systems consulting fees are associated with higher quality financial reporting for various proxies of earnings quality. This area of consulting likely improved the audit firms' knowledge base, leading to improved audit quality. Evidence suggests that the market does not fear an increase in economic dependence from the non-disclosure of NAS.
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CEOs of UK firms receive higher total compensation if their companies have interactions with US product, capital, and labor markets. Moreover, the compensation package is often adopted from American-style arrangements, such as the use of incentive-based pay. Researchers Joseph J. Gerakos (University of Chicago), Joseph D. Piotroski (Stanford), and Suraj Srinivasan (Harvard Business School) analyzed data on the compensation practices of 416 publicly traded UK firms over the period 2002 to 2007. Key concepts include: The reason to compare similarity with the level and style of US pay is because CEOs of US companies typically are among the highest paid in the world. The UK firms' interactions with US markets were measured on four variables: the relative importance of US sales to the firm, the level of prior US acquisition activity, the presence of a US exchange listing, and the US board experience of the firm's directors. All four US market interaction variables correlated with greater pay, but only US operational activities (sales and acquisitions) were associated with pay similar to US-style contracts. The increased compensation alleviates internal and external pay disparities arising from the presence of US operations and businesses, and compensates CEOs for bearing the additional risk and responsibility associated with exposure to foreign securities laws and legal environments.
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High-quality external auditing is a central component of sound corporate governance, yet what determines audit quality? Douglas J. Skinner, of the University of Chicago Booth School of Business, and Suraj Srinivasan, of Harvard Business School, study the Japanese audit market, where recent events provide a powerful setting for investigating the effect of auditor reputation on audit quality absent litigation effects. Specifically, Skinner and Srinivasan analyze events surrounding the collapse of ChuoAoyama, the PricewaterhouseCoopers affiliate in Japan that was implicated in a massive accounting fraud at Kanebo, a large Japanese cosmetics company. Taken as a whole, the researchers' evidence provides support for the view that auditor reputation is important in an economy where the legal system does not provide incentives for auditors to deliver quality. Key concepts include: Auditors' reputation for delivering quality is extremely important. A substantial number of clients dropped ChuoAoyama as the extent of its audit quality problems became apparent, but before it became clear that the firm would be forced out of business. The events at ChuoAoyama and particularly the decision by the Japanese Financial Services Agency (FSA) to suspend the firm's operations can be seen as a watershed event in Japanese audit practice. The FSA used these events to send a message to the Japanese auditing community that the old ways of doing business would no longer be tolerated, and that it was serious about reforming audit practice.
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Chief executives and regulators have been blamed for the current economic crisis, but in some ways what is surprising is that boards have generally escaped notice. Clearly the experience of corporate boards in the downturn has not been explored. To understand what transpired in the boardrooms of complex companies, and to offer a prescription to improve board effectiveness, eight senior faculty members of the HBS Corporate Governance Initiative talked with 45 prominent directors about what has happened to their companies and why. These directors, who serve on the boards of financial institutions and other complex companies, were asked two broad questions: How well did their boards function before the recession? And, what do they believe should be improved as they look to the future? This white paper [PDF] first explains how the interviewees characterize the strengths of their boards, then examines in depth six areas in which they identified shortcomings or needs for improvement: 1) clarifying the board's role; 2) acquiring better information and deeper knowledge of the company; 3) maintaining a sound relationship with management; 4) providing oversight of company strategy; 5) assuring management development and succession; 6) improving risk management. Finally, the paper discusses two issues that appeared not to trouble the interviewees but that the public feels are important: executive compensation and the relationship between the board and shareholders. This paper was written by Jay Lorsch with the assistance of Joseph Bower, Clayton Rose, and Suraj Srinivasan. The interviews were conducted by Joseph Bower, Srikant Datar, Raymond Gilmartin, Stephen Kaufman, Rakesh Khurana, Jay Lorsch, and Clayton Rose. Key concepts include: Regulations and laws offer little guidance about what specifically boards should do, and, given this lack of specificity, most boards have gradually developed an implicit understanding of what their job should be. Directors expressed strong consensus that the key to improving boards' performance is not government action but action on the part of each board. To improve board effectiveness, each board should achieve clarity about its role in relation to that of management: the extent and nature of the board's involvement in strategy, management succession, risk oversight, and compliance. If, as interviewees insisted, each board's effectiveness is directly attributable to its activities, it follows that boards have a responsibility to define their own roles with clarity, and to decide how to perform those roles in light of the nature of the firm, its industry, and its particular challenges. If boards are to decide on their goals and activities, they must expect to invest extended time in hard-headed discussions of both, leading to concrete and actionable conclusions. Boards need to maintain a delicate balance in their relationship with management. They must be challenging and critical on the one hand and supportive on the other. They have to sustain an open and candid flow of communication in both directions. And they must seek sources of understanding their company beyond just management without offending management. Issues of executive compensation and the relationship between boards and shareholders cannot be ignored, if only because they affect public perceptions of business and therefore its social legitimacy. Paper Information Full Working Paper Text Working Paper Publication Date: September 2009 Faculty Unit: Organizational Behavior
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Do managers' presentation decisions within their financial statements reflect informational motivations (that is, revealing the underlying economics of the firm) or opportunistic motivations (that is, attempts to bias perceptions of firm performance)? The authors examine managers' choices to present special items (such as write-offs and restructuring charges) separately on the income statement rather than aggregated in other line items with disclosure only in the footnotes. Prior research suggests that managers engage in opportunistic reporting in other presentation decisions, and that managers' presentation decisions on the financial statement affects users' judgments. The distinction also matters because current changes in reporting standards are likely to increase the occurrence of "nonrecurring" type charges similar to special items, such as fair value changes. Key concepts include: Managers, in most instances, appear to use the flexibility afforded in the presentation of special items to inform users of the underlying economics of these items. Special items receiving income statement presentation are more transitory than those receiving footnote presentation. These results are consistent with managers using discretion in the financial statement presentation of special items for informational reasons. There is limited evidence that opportunistic motivations underlie this presentation decision.
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(Previous title: "CEO and CFO Career Consequences to Missing Quarterly Earnings Benchmarks.") This paper investigates whether the failure to meet quarterly earnings benchmarks such as the analysts' consensus forecast matters to CEO and CFO careers, after controlling for both operating and stock return performance and the magnitude of the earnings "surprise" revealed at the earnings announcement. In particular, it evaluates a comprehensive set of career consequences such as the impact on compensation, in the form of bonus and equity grants, and the dismissal of both the CEO and the CFO, conditioned on the failure to meet quarterly earnings benchmarks. Key concepts include: Missing analysts' consensus forecasts can potentially damage senior executives' careers. CEOs and CFOs also experience compensation penalties if their firms fail to meet the analysts' consensus forecast. Most of these career penalties for missing earnings benchmarks have increased in the post-Sarbanes-Oxley environment.
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